Schumer casts doubt on ‘bad bank’ plan for toxic loans
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Financial shares took another sharp hit today, on an otherwise up day for the stock market overall.
Some traders blamed continued confusion over the government’s next step in the financial-system rescue -– specifically, whether the Obama administration would seek to create a ‘bad bank’ to buy up garbage loans from banks, or try something else.
The bad-bank idea had been gaining traction in Washington in recent weeks as a way to remove rotten assets from banks’ books once and for all. But today, Sen. Charles Schumer (D-N.Y.) threw cold water on the concept.
From Bloomberg News:
Schumer said the Obama administration should provide guarantees for the toxic assets clogging lenders’ balance sheets, rather than set up a ‘bad bank’ to purchase them. There are ‘two problems’ with the bad bank, also known as an aggregator bank, solution, Schumer said. It would probably be ‘very expensive,’ costing as much as $4 trillion. ‘Second, it’s very hard to value those assets,’ and the prices could be set ‘so low that every other bank would go bankrupt.’
If the bad bank bought toxic loans at rock-bottom prices, other banks could be forced to mark down similar securities they hold, wiping out another chunk of their capital.
By contrast, providing government insurance for bad loans, while leaving them on banks’ books, could fence off those assets without forcing big markdowns in the banking system.
But the insurance idea potentially leaves the banks to collect on any better-than-expected recovery of the loans, while taxpayers would eat the losses if the loans worsened. It’s the old ‘Heads I win, tails you lose,’ although the government could benefit in part by demanding stock options from the banks as payment for the insurance.
In any case, the government already has used the insurance option on big blocks of troubled assets at Citigroup Inc. and Bank of America Corp. in the last few months. That hasn’t made investors feel much better about those banks, judging by the action in their stocks.
Citigroup fell 19 cents to $3.46 today, and is down 48% year to date. Bank of America fell 70 cents to $5.30. BofA shares are down 62% this year, and are nearing the multiyear closing low of $5.10 reached on Jan. 20.
-- Tom Petruno